What it means
An actual is what the ledger says after the event, once invoices have been raised, bills have been booked and the period has been closed. Finance people usually use the plural, as in actuals versus budget, and they mean the figures that can no longer be negotiated.
The value of actuals is that they are the only numbers anybody can be held to. A forecast can be argued with, while an actual can only be explained, which is why a sensible variance discussion starts from the actual and works backwards to the cause.
Comparing actuals with the plan produces a variance, which is simply the gap between the two. Finance teams report that gap in dollars and as a percentage, then label it favourable or unfavourable depending on whether it helps or hurts profit rather than on whether it is positive or negative.
Actuals are less absolute than the name suggests, because they depend on cut-off and accrual judgements. A cost incurred in March but invoiced in April belongs in March under accrual accounting, so a weak close process can make the actuals look wrong without a single transaction being wrong.
Many businesses report a blended view, with actuals for the months already closed plus forecast for the rest of the year. Labelling clearly which months are actual and which are forecast is what stops an honest report being read as a promise.
In practice
Real-world examples.
Example
A restaurant group compares actual food cost of $412,000 against a budget of $380,000 for the quarter. Breaking the $32,000 variance down by site shows that two of eleven restaurants account for most of it, which turns a vague cost problem into two specific conversations.
Example
A software company reports actual revenue monthly against both the original budget and the latest forecast. The pattern reveals that the sales team forecasts well for the current month and badly three months out, so the business starts weighting the near-term numbers more heavily.
Example
A construction firm tracks actual costs against the estimate on every contract as work proceeds. On one project the actuals overtake the estimate at 60% completion, which prompts a claim for variations before the job finishes rather than an argument afterwards.
Formula
Calculation
Variance = Actual - Budget
Variance % = (Variance / Budget) x 100
Suppose a marketing department was given an annual budget of $250,000 and the closed year shows actual spending of $265,000.
Variance = $265,000 - $250,000 = $15,000
Variance % = ($15,000 / $250,000) x 100 = 6%
Because this is a cost line, spending $15,000 more than planned is an unfavourable variance of 6%. If the same $15,000 gap appeared on a revenue line, with actual revenue of $265,000 against a budget of $250,000, the identical arithmetic would be a favourable variance of 6%.Case study
Seen in the real world.
The following is a fictional and illustrative example. Arbellon Signs, an invented signage manufacturer, produced management accounts showing actuals against budget every month, and every month the conversation was the same: the operations manager insisted the figures were wrong. Costs appeared in the wrong months, and one month would show an impossibly low material cost followed by an alarming spike.
Nothing was wrong with the transactions. Supplier invoices were being booked whenever they happened to arrive, sometimes six weeks after the materials were used, so the actuals reflected the postroom rather than the production schedule. The budget was monthly and even, while the actuals were lumpy for reasons that had nothing to do with the business.
Arbellon introduced a simple accrual step at each month end, estimating unbilled materials from goods received notes and reversing the estimate when the invoice arrived. The actuals became comparable with the plan, the monthly argument stopped, and the operations manager began using the report to manage waste instead of to dispute it. The illustrative lesson is that an actual is only useful once the cut-off is trustworthy.
Watch out
Common mistakes.
- Treating actuals as beyond question, when they depend on cut-off, accrual estimates and how completely the period was closed.
- Labelling every negative variance unfavourable, when underspending on a cost line is positive for profit and overspending on revenue-generating activity may be too.
- Mixing actual and forecast months in one total without saying which is which, which makes a reasonable report look like a commitment.
Questions
People also ask.
What is the difference between actuals and management accounts?
Actuals are the recorded figures themselves, while management accounts are the report that presents those figures alongside budget, forecast and commentary.
How quickly should actuals be available?
Most businesses aim to close within five to ten working days of month end, and getting broadly right numbers quickly is usually more valuable than getting perfect numbers late.
Can actuals change after the period closes?
They can be restated if an error or a missed accrual is found, and any restatement should be disclosed clearly so that comparisons with earlier reports still make sense.
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